Foreign Cash Could Bolster Dell LBO Financing

Senior Editor

Dell Inc. may be able to leverage its significant foreign cash holdings to assist with a private-equity buyout of the computer manufacturer without triggering the repatriation taxes that have kept it out of the U.S.

Buyers of the company could use the cash as collateral to raise deal financing, and effectively reduce the amount of equity they would have to put into the deal, according to tax and accounting specialist Robert Willens.

Mr. Willens said U.S. tax law makes it difficult for companies with foreign cash holdings to use that money to fund buyouts, as money used directly or indirectly to raise capital is treated as repatriated and therefore subject to being taxed at a 35% rate. But companies are allowed to use up to 65% of their equity in a foreign subsidiary as collateral against a loan without triggering tax payments. That would allow Dell to effectively pledge the cash backing the equity in the subsidiaries to fund the deal.

“Dell has to raise a lot of debt capital. One way to do it more economically is by pledging the attractive collateral as security for the loan,” Mr. Willlens said, in an interview with CFO Journal. “That would allow them to raise more debt capital at more attractive rates.”

Mr. Willens added that it’s likely any bank or lender that accepts the foreign subsidiary shares as collateral would value them at a discount, owing to the fact that the money would still be overseas.

As CFO Journal reported on Monday, analysts have said Dell’s foreign cash holdings could complicate a buyout of the Round Rock, Texas-based computer maker. Repatriating that money to the U.S. would force buyers to pay taxes at the top corporate tax rate and lower returns buyers could expect from the investment. The company has almost all of its $14.2 billion of cash, cash equivalents and investments held in foreign subsidiaries.

However, buyers of the company could decide to just leave the money offshore and use the loophole in the tax code to borrow against it, according to a tax attorney. By increasing the amount of debt used to finance the deal, the buyers could then increase the interest cost on Dell’s balance sheet, and force the company into a loss position.

Those losses could then offset any taxes on money they brought back from overseas, allowing them to slowly repatriate the money from overseas to pay back the debt on Dell’s balance sheet.

“You can dribble the money out, and wait until there’s a different tax regime to bring more of it back,” said the tax attorney, in reference to a potential change in tax law that would reduce or eliminate the repatriation tax.

The Wall Street Journal reported on Tuesday that private-equity firm Silver Lake Partners is in talks this week to buy Dell in a leveraged buyout valuing the company at $13 to $14 a share. The buyout, which would include Dell founder Michael Dell and one other investor, would require $2 billion of equity and new debt of $15 billion, to meet a purchase price as high as $25 billion.

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